On 30th May, the current caretaker government presented the federal budget for the fiscal 2078/79 through an ordinance. The government’s swiftness to present the budget through ordinance (since the Parliament stands dissolved) has been questioned because it was not a matter of urgency, constitutionally or otherwise. 

NPR 1.64 trillion is the size of the budget and is primarily portrayed as an effective response to the covid-19 situation, albeit limited to words. Ironically the term “Covid-19” has been used 42 times and a meagre NPR 68.28 billion i.e. approx. 4% of the total budget has been allocated to directly deal with the Covid-19. 

Where Nepal experienced a negative growth rate in FY 2076/77 and is projected to attain a growth rate of below 4% in the current fiscal, the budget also presents an overoptimistic target of 6.5% growth in the next fiscal.  

Fiscal Deficit

The fiscal deficit i.e. the total money spent by the government in excess of the total revenue collected, for the fiscal year 2076/77 stood at 8.1% of the GDP (Economic Survey 2078) and until the end of Falgun 2077, the fiscal deficit had improved by 65.5%. The current budget projects a budget deficit of  NPR 559.30 billion i.e. 33.94% of the total budget which shall be financed through borrowings. 

This definitely shows that the government is planning to spend a lot more than it can collect as revenue and financing significant freebies in the name of relief  and recovery plans through borrowings. At this point, we need to really ask ourselves if this is a sustainable way towards the proposed economic recovery.  

At the current projections, the fiscal deficit ratio to the GDP may reach double digits and the public debt is projected to reach almost half of the GDP by the next fiscal.

Sources and utilization  of Budget (Amount in NPR billion)

Sources (Revenue)Utilization (Expenditure)
Revenue1024.90 (62.2%)Recurrent Expenditure678.61 (41.2 %)
Foreign Grants 63.37 (3.85 %)Capital Expenditure374.26 (22.7 %)
Internal Loan 250.00 (15.17%)Lower level grant386.71 (23.7 %)
Foreign Borrowings309.29 (18.77%)Financing Provision207.97 (12.6 %)

Covid 19 Response

The budget allocated for the prevention, cure and treatment of Covid is around NPR 68.28 billion among which a total of NPR 4 billion for the necessary equipment required for the treatment of Covid-19 patients, NPR 26.75 billion for the vaccination management and NPR 37.53 billion for the prevention, control and management of Covid-19.

As expected, the health sector has received special attention in the budget for the new fiscal year for the second year in a row, as the country battles with the devastating effects of a second wave of the coronavirus.. Effective implementation of the budget will be the most challenging part amid the ongoing pandemic. 

Budget prioritizing  digitalization 

The prioritization of  digital technology with the implementation of Digital Nepal Framework symbolizes a step ahead to support innovation, technological advancement. Issues relating to cyber security, probably the first in budget history,  have been addressed and focus on formulation of E-commerce budget has been centered. 

The introduction of “Mero Kitta” and “Nagarik app” along with establishment of a National Payment Switch by maintaining interconnection between card payment, retail payment, QR code and other electronic payment methods is a progressive plan.

Arrangements for the workers in foreign employment to send money home easily from their mobile wallets with an additional 1% interest amount has been made provided the remittance amount received from the banking system. The visions and plans for Digital Nepal using digital and artificial intelligence are impressive but again, uncertain as regards its implementation. 

Promoting start-ups, entrepreneurship and skill development 

Important takeaways: 

  • One door system with free registration, renewal and other services for startups, 
  • 100% income tax exemption to the startups for 5 years and 
  • To promote seed investment in startups, tax deduction of seed investment of up to NPR 100,000 per startup to a maximum of five. 

Moreover, a concessional loan of up to NPR 2.5 million at 5% interest rate is proposed for graduates against their certificates as collateral. 

The government also plans to establish a Challenge Fund of NPR 1 billion. Through these the government may have opened new access to finance for youths to pursue entrepreneurship but timely and efficient implementation looks unlikely. There were similar provisions in the previous budget too, however, due to delay in formulating the procedural guidelines and other issues, the funds are yet to be mobilized. 

In order to support alternative education which may in turn aid in skill development, the government has announced concessional loans of NPR. 80,000 at 1% interest to purchase laptops for students at higher secondary level or higher. Yet budget allocation for skill oriented and vocational education is still missing. 

Industries and Investment 

NPR 5.21 billion is explicitly allocated for the Development of Industries and Investment Promotion sector. Special emphasis has been given to the “Made in Nepal” and “Make in Nepal” campaign which is to be conducted in collaboration with the private sector to establish and operate industries of comparative advantage.

The proposal to provide 50% capital grant to hospitals in case they establish an oxygen plant & 50% discount on the electricity tariff for the production of oxygen during the COVID-19 pandemic is promising. The decision to appeal to the world’s top 10 brands of electric vehicle manufacturing and assembling companies to set up their industry in Nepal is quite ambitious.

Likewise, funds have also been allocated to develop skilled manpower tailored to the needs of domestic industries, development of special economic zone (SEZ) infrastructure, construction of industrial villages and construction of industrial infrastructure.

To minimize the trade deficit, one of the initiatives announced is the export of sand, stones and gravels based on environmental impact assessment. Also exemption of customs duty on import of equipment to construct ropeway for transportation of above materials have been announced. Given the way environmental impact assessments are conducted and limited to documentary approvals, this may pose serious environmental problems particularly in the ecologically fragile Terai region where illegal mining has always been an issue. 

For the private sector hydropower investors, there isn’t any concrete announcement as such other than plans to enter into than bilateral and multilateral agreements to facilitate power trade and export. Certain initiatives for promoting internal tourism and also reviving the entire tourism sector (that has been one of the worst affected sectors due to pandemic) have been announced but seems too late and too little.

Tax concessions and other facilities

Notable tax concessions and facilities have been ensured by the budget. Portioning 1% income tax including automatic renewal for certain COVID affected businesses, exemption of excise duty and deduction in custom duty for import of electric vehicles are some remarkable concessions. There is a provision for immediate refund of the amount of 10% of VAT paid by purchasing goods and services through debit card, credit card, QR code, scan-to-pay and other electronic means. The company can enjoy waiver of remaining fees of the companies that have not submitted their annual statements up to the F/Y 2075/76 and have not renewed, if they submit all the documents along with 10% fines within the end of month of Ashoj, 2078.

Tax concessions and facilities proposed by the budget sounds encouraging and hopeful at plain sight but there are no free lunches in reality. The special encouragement to establish the oxygen industry through concessions is typically noteworthy. However, governments raise funds through taxes and ultimately the cost is borne by the individual.

Infrastructure development

The budget includes different infrastructures programs that also covers a few ambitious aviation projects like Nepal Airlines Corporation will be restructured and made commercial and competitive. Amount has been set aside to transform Tribhuvan International Airport into a boutique airport and completing the construction for Pokhara International Airport.

Expansion and upgrading of major highways, construction of strategically important roads, construction of flyovers and tunnels in urban areas, completion of 300 new bridges will also be covered by the allocated budget.

Agriculture 

Modernization and commercialization of agriculture to be the base for an uplifting economy.  The establishment of chemical fertilizer industry within 3 years and increment of chemical fertilizer subsidy to NPR 12 billion is praise worthy. Encouragement of the use of composite and organic bio-fertilizer to promote organic farming is a noble step in soil protection. Allocation of NPR 840 million as subsidy to the sugarcane farmers within 15 days after the sale of sugarcane addresses the grievances of the sugarcane farmers. 

The government is expected to make rice self-dependent within 5 years and this can clearly paint the holistic picture of Nepalese agricultural system. It is praiseworthy for the government to take the initiative to become food self-dependent. In a nutshell, the government is full of promises and ambitions for the agricultural and livestock sector but the future shall answer it best.

Law and Justice

The total allocated budget for the Court stands at NPR 67 million and for the Ministry of Law, Justice and Parliamentary Affairs is at NPR 515.6 million. The budget focuses primarily on the improvement of court-infrastructure, legal accessibility and justice to the victims of the past political movements. 

The budget allocation for Law and Justice seems broad and repetitive. The allocation of budget for the Truth and Reconciliation Commission and the Commission of Investigation on Enforced Disappeared Persons is another important yet hollow promise as substantive follow-up has hardly been evident in the past. 

Wrapping it up:

All in all, the budget seems more or less a quick fix to the ongoing situation of Nepal without having a clear blueprint towards sustainability. Long term planning is evidently missing and when it has been termed as a “Covid centric budget”, setting up a virology research center, state of the art testing facilities and vaccine manufacturing units should have been in the agenda. 

In terms of addressing immediate issues at hand, the budget also fails to provide any immediate relief for those (esp. in the informal sector) who have lost their employment and livelihood due to Covid-19. Offering discounts on supply of certain daily essentials may be helpful only for those who still have a regular income. 

The budget has attempted to “include all” and “please everyone” and can be categorized as a ‘populist’ budget. The scheduled mid-term election seems to be the implicit focal point in the preparation. 

FYI, a populist Budget typically spends on schemes that are just handouts to please people and don’t have any enduring positive impact on the economy.  

That was all for our budget analysis.

Please let us know your feedback. If there’s someone you know who loves the budget, look no further. Feel free to share this analysis.


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